News Digest

Fortnightly Magazine - October 15 1999

Mergers & Acquisitions

CP&L + Florida Progress. Carolina Power & Light announced Aug. 23 that it would purchase Florida Progress Corp. for $5.3 billion in a combination that would create the nation's ninth-largest utility in terms of generating capacity, with $6.7 billion in annual revenues and 2.5 million customers in three states. CP&L would pay a premium (between 16.5 percent and 21 percent) over the pre-announcement share price of FP stock.

The utilities predict merger savings of over $100 million per year - in part by eliminating 7 percent (1,250) of job positions (CP&L has 7,650 employees, FP 9,600) - but promise no layoffs until merger completion, expected next summer.

"We will try to manage this downsizing through attrition," said CP&L chairman, president and CEO William Cavanaugh, who will lead the new company in those positions.

Western Resources + KCP&L. Progress emerged on three fronts as regulators in Missouri and Kansas and at the Federal Energy Regulatory Commission all took some action on the proposed merger between Western Resources Inc. and Kansas City Power & Light Co., to form Westar Energy.

* Missouri. Missouri regulators approved the merger through an uncontested stipulation and agreement providing for a three-year electric rate moratorium effective the date the merger closes, plus a $5 million rate credit to Missouri retail electric customers in the 14th month after the merger and a rate base reduction as well if the merger is treated as a taxable transaction by the Internal Revenue Service. Case No. EM-97-515, Sept. 2, 1999 (Mo.P.S.C.).

* Kansas. Earlier, on Aug. 24, Kansas regulators had outlined a tentative agreement on the merger that would hold ratepayers harmless for four years for any merger-related costs, after reopening the record on the request of industrial customers - a move that had angered utility management - so as to review and learn from the Missouri settlement negotiations. See Docket No. 97-WSRE-676-MER, Order No. 40, Aug. 2, 1999 (Kan.C.C.).

* FERC. Meanwhile, according to Western Resources, the partners reportedly had reached a settlement with FERC staff resolving issues on market power and customer protection, and calling for Westar to join a regional transmission organization. Western Resources management was interested in RTO formation efforts at Southwest Power Pool, which claims both merger partners as members. See FERC Docket EC97-56-000.

FirstEnergy + Volunteer. FirstEnergy Corp. announced Aug. 31 that it had signed a nonbinding letter of intent to acquire Volunteer Energy LLC, a Williams Co. subsidiary based in Columbus, Ohio, with 30,000 retail gas customers and $150 million in revenues (1998).

Volunteer would join FirstEnergy Trading Services Inc., headquartered in Akron, marking the third natural gas operation acquired by First Energy since June 1998.

Suez + United Water. On Aug. 23, the second-largest water utility in France, Suez Lyonnaise des Eaux, announced the takeover of United Water Resources Inc. (Suez already owned 30 percent of UWR) for about $35.50 per share - a premium of 45 percent.

The deal would require approval of PUCs in the 13 states in which UWR offers regulated water utility distribution service.

Cajun Bankruptcy Settlement. A settlement was reached in the four-and-one-half year bankruptcy proceeding for Cajun Electric Power Cooperative, to allow The Southern Co. and NRG (a subsidiary of Northern States Power Co.) to acquire the wholesale co-op for over $1 billion, with Cajun selling its non-nuclear generating assets to Louisiana Generating LLC for $1.026 billion. Rival bidder Southwestern Electric Power Co. (SWEPCO), a subsidiary of Central & South West Corp., agreed to withdraw from proceedings in return for a $7.5 million payment from the Southern/NRG partners.

But although the settlement was confirmed Sept. 1 by bankruptcy judge Gerald H. Schiff, Southern Co. appeared unsure as to whether to proceed, as a recent federal appeals court ruling had indicated that the bankruptcy judge had overstepped by attempting in the settlement to block a state PSC rate order. See News Digest, Public Utilities Fortnightly, Oct. 1, 1999, p. 22

Courts

Pole Attachments. A federal appeals court upheld recent amendments to the 1978 Pole Attachments Act via the 1996 Telecommunications Act, denying claims by electric utilities that rules mandating access to utility poles for telephone and cable television wires were unconstitutional. The court acknowledged a "taking" of property, but said the act offered an adequate process to utilities for securing just compensation, to be determined by the Federal Communications Commission. Gulf Power Co. v. U.S., No. 98-2403, 1999 WL 699763, Sept. 9, 1999 (11th Cir.).

Natural Gas Explosions. In reviewing a $2 million damage suit following a 1994 gas explosion and fire at a Ramada Inn, an Illinois appeals court said claims regarding the design and 1961 installation of the gas piping system were barred by a 10-year statute of limitations, but not other claims concerning the continued sale of gas.

The court held the plaintiff could proceed on the theory that the gas company owed it an ongoing duty of care to operate and maintain the gas system in a safe manner. MBA Enterprises Inc. v. Northern Ill. Gas Co., No. 3-98-0305, 1999 WL 683850, Aug. 31, 1999 (Ill.App.).

Electric Transmission. Interpreting a 1995 state law, a Texas appeals court struck down state PUC rules that had required electric utilities to offer nondiscriminatory access to transmission service under a postage-stamp access fee plus a distance-sensitive rate component.

It said the commission lacked authority to set its own transmission rates, as the legislature had envisioned the PUC only as "an overseer" of private negotiated arrangements to ensure transmission access. City Pub. Serv. Bd. of San Antonio v. Texas PUC, No. 03-98-00127, 1999 WL 644729, Aug. 26, 1999 (Tex.App.).

Customer Choice Quotas. A Pennsylvania court upheld a state PUC plan forcibly to switch up to 80 percent of electric utility customers who otherwise elect not to choose an alternative power supplier under the state's retail choice plan, or who cannot find a new supplier willing to provide the requested service.

State legislator Camille "Bud" George had opposed the plan, claiming that mandatory assignment of customers to an "alternative provider of last resort," without customer consent, was akin to illegal slamming. George v. Pa. PUC, No. 3088 C.D. 1998, 1999 WL 604537, Aug. 12, 1999 (Pa.Commw.Ct.).

State PUCs

Proprietary Data. Minnesota has adopted revised procedures for handling trade secret and privileged data, effective Sept. 1. Under the procedures, data identified as "proprietary" will be considered public, while data classified as "trade secret" and "privileged" will be protected from public disclosure. See www.state.mn.us/ ebranch/puc/download/default.htm.

Voluntary Retail Choice. In letters addressed to the Michigan PSC, both Consumers Energy and Detroit Edison Co. reaffirmed their intent to proceed voluntarily with customer choice programs for electricity. Mich. PSC Case No. U-11290, letters filed Sept. 1, 1999.

A state court had struck down the commission's mandatory choice plan in June, but the PSC ruled in mid-August that it could proceed with the plan if utilities participate voluntarily. See News Digest, Public Utilities Fortnightly, Sept. 15, 1999, p. 18.

Electric Retail Choice. Thirty-one days before the scheduled Oct. 1 start date for electric retail choice, Delaware adopted rules for certification and regulation of electric suppliers and a restructuring plan for Delmarva Power & Light Co.

* Supplier Certification. The rules will allow customers of Delmarva P&L to choose to receive either separate or combined bills from their electric supplier and DP&L (doing business as Conectiv Power Delivery). The rules also provide that supply service using at least 50 percent renewables will be considered "green power" service, and also require net metering for customers using on-site renewable generation. Order No. 5207, Aug. 31, 1999 (Del.P.S.C.).

* Stranded Costs. A restructuring plan approved by the Delaware PSC the same day does not require DP&L to divest generation assets, but also does not allow the company to recover through rates its calculated $50 million in stranded costs. The commission will keep in place Delmarva's pre-competition code of conduct but will consider changes to the code in a new docket, to be completed by June 30, 2000. Docket No. 99-163, Aug. 31, 1999 (Del.P.S.C.).

Gas Service Quality. Pennsylvania's newly approved service guidelines for natural gas require that customer protections "at minimum, be maintained at the same level of quality under retail competition" as on date of passage of the state's gas competition legislation.

All suppliers must receive uniform treatment from natural gas local distribution companies with respect to the supplier selection process (set up by the LDCs). The rules also provide guidelines for complaint and dispute resolution, termination for failure to pay and the application of partial payments. Docket No. M-00991249, Aug. 26, 1999 (Pa.P.U.C.)

Electricity Delivery Unbundling. A commission staff draft schedule for unbundling electric delivery services in Illinois sets Nov. 15 as a target date for a first interim order on the issue, with a second interim order to be issued Jan. 7, 2000 and the final order coming May 1, 2000. Matters to be addressed range from determining what metering services would be unbundled to establishing standards for data distribution to market participants, and open architecture standards for data exchange. See http://icc.state.il.us/icc/Dereg/DlvrSvcs/99-0013/general.htm. Docket No. 99-0013.

Electric Supplier Fee. The New Jersey board approved a "TPS" fee to be charged by utilities to third-party electric suppliers to recover costs incurred on behalf of suppliers, dismissing arguments that such fees might harm competition.

Utilities must file a review of its initial TPS fee structure by Aug. 1, 2000, and may petition the board annually for fee adjustments. An electric utility must offer the same TPS agreement to all suppliers.

Electric Reliability. Concerned over power outages during the week of July 4, the New Jersey board opened an investigation on the reliability of the state's four largest electric utilities.

The BPU was seeking consultants to investigate system reliability of subsidiaries of Conectiv Inc., Consolidated Edison, GPU Inc. and Public Service Enterprise Group, while at the same time commencing its own internal investigation into whether utilities followed the BPU's customer notification recommendations during the outages.

Gas Market Reforms. Hearings were scheduled for Oct. 25-29, with initial briefs due Nov. 19, as the California PUC proceeds to develop a report for the state legislature on restructuring the California natural gas industry.

The PUC said that parties to the reform process should begin negotiating the details of a new market structure that (1) retains the local distribution company procurement function, (2) creates a system of firm, tradable intrastate transmission rights available to individual shippers, (3) allows shippers to bid for firm storage access rights and to sell unused capacity on a newly developed secondary market, (4) provides customers with adequate "real-time" information about LDC balancing practices, while promoting the ability of shippers to trade or sell imbalance rights purchased as part of their intrastate transmission service, and (5) removes threshold limits and system-wide caps on existing aggregation programs for core customers.

Overall, the PUC said it would seek to improve reforms implemented by Pacific Gas & Electric Co. under the 1997 "Gas Accord" settlement - by which PG&E currently operates a temporary open-access intrastate transmission system in its Northern California service area - with all end-users, marketers, producers and brokers able to hold "path-specific firm or as-available transmission service contracts." D. 99-07-015, R. 98-01-011 (renumbered as I.99-07-003), July 8, 1999 (Cal.P.U.C.).

Electric Distribution Systems. The Alabama PSC ruled that if the federal government should decide to sell its electric distribution facilities at Maxwell Air Force Base to a private contractor, the new owner would be required to obtain a certificate of public convenience and necessity.

But the commission added that Alabama Power Co. could purchase the facilities and take over distribution activities under its existing certificate, without applying for a new one. Docket U-4034, Aug. 4, 1999 (Ala.P.S.C.).

Business Wire

Financing has been secured and construction was to begin immediately on the new 830-megawatt Tenaska Gateway Generating Station, a natural gas-fired, combined-cycle electricity generation facility, in east Texas. The facility will be owned by affiliates of Tenaska Inc. and Coral Energy L.P., while other Coral affiliates will deliver the fuel and purchase the electricity output of the facility. The generating station will have the ability to dispatch power within the Electric Reliability Council of Texas and to other power grids. Coral will incorporate the plant into its regional supply portfolio, selling the power on a merchant basis directly into ERCOT and the Southwest Power Pool.

CMS Energy announced that it has executed definitive agreements with its Ghanaian partner, Volta River Authority, for the accelerated construction, joint ownership and operation of a second 110-MW, natural gas-fueled turbine generator at Unit 2 of VRA's Takoradi Thermal Power Plant near Aboadze, Ghana. CMS Energy and VRA have formed a joint venture, Takoradi International Co., to construct and operate Takoradi Unit 2, which will be a 330-MW, combined-cycle unit identical to the already-commissioned Takoradi Unit 1.

Cannon Technologies Inc. will begin shipment later this year of its LCR 5000, the utility industry's first load control receiver to use Motorola's 900 MHZ FLEX( paging technology. The LCR 5000 enables utilities to use a national paging network to control air conditioners, water heaters, distributed generation, irrigation pumps, oil wells and other customer loads.

SPS Payment Systems Inc. has announced a name change to Associates Commerce Solutions. The company, which serves utilities including ConEdison, was purchased by Associates First Capital Corp. in October 1998. SPS provides retail private label credit card services and call center teleservices. The name change was to take place Sept. 27.

State Legislatures

Hostile Takeovers. Fearing possible job losses and higher energy prices, Rep. David Goodman on Aug. 25 announced he would introduce state legislation to provide Ohio utilities with protections against hostile takeover attempts by out-of-state companies.

At the beginning of the month, Goodman had expressed concern over the hostile takeover bid by NiSource Inc. for Columbia Energy Group, the parent company of Columbia Gas of Ohio. Goodman, who serves on the Ohio House Public Utilities Committee, said, "I intend to introduce legislation that will ensure all hostile takeovers involving public utilities in Ohio will receive appropriate levels of regulatory review and public scrutiny - before the deals are too far along to offer adequate protections to Ohio jobs and consumers."

Goodman's bill would require the PUC to investigate any hostile takeover when a tender offer is made and prohibit the Ohio PUC from approving such a takeover without first finding public convenience and reasonable cost for utility services.

Generating Capacity. The Maine PUC on Aug. 23 approved the transfer of Bangor Hydro-Electric Co.'s 50 percent ownership interest in the 20-MW West Enfield hydroelectric station to Penobscot Hydro LLC, a subsidiary of PP&L Global Inc. The plant will continue to sell its output to Bangor Hydro under a long-term contract through 2023.

Earlier in 1999, Penobscot Hydro received approval to purchase Bangor Hydro's seven hydroelectric stations and sell the output to Bangor Hydro until March 2000, when Maine's electric restructuring law becomes effective.

Utility Construction. Concerned over a narrow, 1.4 percent reserve margin by 2001, the Florida PSC authorized Gulf Power Co. to construct a 529-MW, combined-cycle, gas-fired power plant, finding that the "self-build" option would offer ratepayers over $116 million in net present value savings when compared with other alternatives, including power supply bids solicited by the utility. Docket No. 990325-EI, Order No. PSC-99-1478-FOF-EI, Aug. 2, 1999 (Fla.P.S.C.).

Electric Pricing

Electric Rate Cuts. New Mexico regulators on Aug. 25 approved an across-the-board 6.73 percent rate cut for customers of Public Service Co. of New Mexico, resulting in rates being cut by about $34 million. The cut led Standard & Poor's and Moody's Investors Service to upgrade PNM's bond rating to investment grade status, given that the settlement had removed a degree of uncertainty.

The settlement called for PNM's rates to remain effective until electric competition begins in the state, or until Jan. 1, 2003, if there is a delay in customer choice implementation. Retail customers are scheduled to choose suppliers beginning in 2001.

"This latest rate cut, our second in five years, brings PNM prices to their lowest level since 1985," said PNM chairman, president and CEO Benjamin Montoya.

Power PLants

Electric Restructuring Plans. The New Jersey board OK'd an overall 10 percent rate cut for Public Service Electric & Gas Co., to be implemented incrementally through August 2002, beginning with an initial 5 percent rate reduction. The next cut, an additional 2 percent at minimum, would come on or after Jan. 1, 2000, subject to the issuance of a "bondable transition cost rate order" establishing a securitization bond charge and providing for the securitization of $2.4 billion of generation-related stranded costs. Additional cuts would follow through 2002.

The board allowed the company to recover $2.94 billion net-of-tax of its generation-related stranded costs, based on a market valuation of $46 million and $1.857 billion for nuclear and fossil generating assets, respectively. Aside from the allowable $2.4 billion securitization, the company may recover $540 million through a "market transition charge."

Studies & Reports

Natural Gas Prices. National Utility Service released a survey on Aug. 23 finding that U.S. natural gas prices had dropped 6.8 percent over the prior 12 months, or about 40.3 cents per therm since Sept. 1, 1998.

And NUS expected that gas prices would drop even lower, even as the U.S. Energy Information Administration was reporting a significant reversal of recent price trends, with gas spot prices at the Henry Hub climbing significantly during the week of Sept. 6-10. EIA cited late summer warm weather in some eastern areas, indicating that gas prices were climbing with higher electric consumption.

"Supply is increasing with new pipelines form Canada adding to the currently available supply of gas in the United States," said Richard Soultanian, NUS co-president.

But Soultanian tempered the NUS predictions of lower prices, citing nuclear plant decommissioning as the "wildcard" for natural gas prices. "As these plants go off-line, new power plant construction is geared towards natural gas," he observed. "This could substantially increase demand - and reduce the likelihood of price cuts." Contact Soultanian at 800-888-2190.

Retail Energy Choice. By the start of September the number of U.S. consumers electing alternative electric and natural gas suppliers had doubled since Jan. 1 and was predicted to rise another one-third by year's end, according to a study by Cambridge Energy Research Associates.

With natural gas and electric power competition concentrated in just a few states, the number of customers choosing non-utility providers had reached 3 million, with another million projected to change by Dec. 31, according to the report, "The Rise of a New Era: Retail Choice Gains Momentum."

"This is the breakthrough point in the marketing and economics of deregulated energy in the U.S.," said Paul Parshley, director of CERA's North American power team. "After many years of experimentation, several companies have a large enough 'critical mass' of customers to achieve the scale needed to drive down the average cost of marketing and customer service and create a profitable retail energy business." See www.cera.com.

Commercial Gas Usage. According to a Gas Research Institute report, domestic natural gas consumption in the commercial sector should grow 1.2 percent annually through 2015, slightly ahead of the growth rate for total commercial energy consumption during that same time period.

GRI's "1999 Commercial Sector Summary" projects commercial gas demand will increase from 3.3 quads in 1997 to 4 quads in 2015. Total commercial energy consumption, which accounts for 10 percent of all domestic energy demand, is expected to grow 1.1 percent annually from 7.6 quads to 9.2 quads by 2015.

The report finds increased opportunities for use of distributed generation, especially as restaurants, supermarkets and warehouses seek to decrease risk from electric outages. The study (GRI-99-0007) can be ordered by fax at 630-406-5995.

Transmission & ISOs

New ISO Members. Northern States Power Co. has agreed to join the Midwest ISO, after winning assurance from Madison Gas & Electric, Wisconsin Public Power Inc., Wisconsin Energy Corp., Municipal Electric Utilities of Wisconsin and the Citizen's Utility Board that they will not oppose or delay the company's planned merger with New Century Energies (though the CUB may still contest adverse impacts on customer rates or service quality).

"This should place all of the Wisconsin transmission system under a single operator, which will benefit all Wisconsin electric consumers," said Roy Thilly, president and CEO of Wisconsin Public Power.

Earlier, NSP had pledged to join the Midwest ISO only if state PUCs and the FERC would ok the still-pending merger (see FERC Docket EC99-101-000). New Century Energies, centered in Denver, owns Public Service Co. of Colorado and Southwestern Public Service.

Transmission Service Contracts. U.S. District Court Judge Anne Conway ruled that Florida Power & Light Co. violated a settlement with the U.S. Department of Justice and staff at the Nuclear Regulatory Commission, in which it had agreed to transmit power for neighboring municipal utilities, and set trial on antitrust law issues.

The Florida Municipal Power Agency claimed that FP&L denied access to transmission, allegedly delaying acquisition of generating resources for municipal electric systems. Fla. Mun. Pwr. Agency v. FP&L, Case No. 92-35-Civ-Orl-22C. Aug. 18, 1999 (Mid.Dist., Fla., Orlando Div.).

Grid Reliability. The Western Systems Coordinating Council on Sept. 1 began implementing its "reliability management system," aimed at maintaining electric system reliability for the Western Interconnection, following FERC approval by letter order of RMS contracts signed by 26 WSCC members. Docket No. ER99-3396, July 29, 1999 (F.E.R.C.).

Phase I includes control performance standards, operating reserve and operating transfer capability. Disturbance control standards, automatic voltage regulators, and power system stabilizers were to become effective Oct. 1.

WSCC is the first regional electric reliability council in North America to take steps prior to legislation to implement a program with sanctions to preserve reliability. WSCC believes the RMS implementation is consistent with efforts by North American Electric Reliability Council to seek enactment of federal legislation to provide for North American reliability standards.

News Digest was compiled by Carl J. Levesque, editorial assistant, Lori A. Burkhart and Phil Cross, contributing legal editors, and Bruce W. Radford, editor-in-chief. For continual news updates, see www.pur.com.


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